We have written extensively about the erosion of foreign banking secrecy, IRS discovery of undeclared foreign accounts, and the IRS Offshore Voluntary Disclosure Program (OVDP) to come into tax compliance before the IRS discovers the foreign assets. However, entering the OVDP means that you will pay a 27.5% penalty on the highest aggregate value of the foreign assets. We recognize that this penalty, although much less than civil and criminal tax fraud penalties, is still quite onerous. The question thus becomes: are alternatives available to come into IRS compliance, and, at the same time, to also avoid the 27.5% penalty of the OVDP?
If You Have an Unreported Foreign Account,
You Really Should Be Thinking about Tax Compliance
If you have a foreign account that you have not declared to the IRS, you really should be giving thought to how to bring the foreign account into compliance now. It will only get more difficult to keep the account open, to access your offshore funds, and to keep the IRS from discovering the account. And, when the IRS does eventually discover the account, it will only get more expensive to correct the non-disclosure and defend against a tax fraud prosecution.
Foreign Banks Are Freezing and Closing Accounts and Limiting Access to Your Money
If you don’t bring the foreign account into IRS compliance, you will have problems trying to access the funds. Many foreign banks are simply freezing the accounts of Americans until the account holders provide signed IRS Forms W-9 or otherwise demonstrate evidence of U.S. tax compliance. If you provide a W-9 to the bank, the bank will likely share your identity and your banking information with the IRS.
We have had many clients tell us that their foreign bank has frozen their account, and they request that we intervene to get the bank to release their money. While we can often assist in that regard, the larger issue is: what are you going to do about the IRS finding the account?
In addition to freezing accounts, many foreign banks are simply closing the accounts of Americans, or of foreign nationals suspected of having a U.S. address or a U.S. tax nexus. These banks do not want to deal with the IRS and with U.S. compliance burdens. These banks are concluding, as a business matter, that it makes better sense for the banks to cease offering banking services to people with a U.S. nexus.
We have assisted clients in keeping open their compliant foreign accounts, and we have assisted other clients in locating new foreign banks to take their compliant foreign funds. If you have an undeclared foreign account, and your bank is telling you to leave, you will have to anticipate the successor bank asking the same sort of “know your client” and source of funds inquiries, and asking you to sign a IRS Form W-9. It is getting harder and harder to simply leave foreign Bank A and move the account to foreign Bank B. Very few foreign banks remain willing to take your non-compliant funds.
You Will Have Difficulty Getting Your Money Back to the U.S.
Wiring the funds back to the U.S. is not advisable. A sudden wire transfer of a large dollar amount into a U.S. account would likely lead to the receiving bank asking questions about the wire transfer, the source of funds, and whether the funds are tax-compliant. Banks will not ignore their due diligence and “know your client” obligations, no matter how friendly you might be with your banker. The compliance and legal risks to the bank are too significant.
Moreover, an inbound wire transfer could cause the bank to file an SAR (Suspicious Activity Report) with the U.S. Treasury Department, and there is no requirement that the bank even let you know that it is filing an SAR. Even if you try to deposit a foreign bank check and avoid a large wire transfer, the U.S. bank will likely ask the same questions.
Finally, even assuming that you can get your foreign funds safely back into the U.S., you still have to worry about the IRS discovering the past non-compliance when the funds were offshore. As discussed below, the IRS is interested in the past history of the non-compliant foreign account, even if that account is now closed.
Your Options Are Limited as to Where to Keep the Funds Outside the U.S.
As noted above, it will not be easy for you to simply find a new foreign bank, one that will overlook the fact that your funds are not U.S. tax compliant, one that will not ask you to sign a Form W-9, one that is not concerned about FATCA (the Foreign Account Tax Compliance Act) which will require the bank to report information to the IRS.
FATCA is a U.S. law, passed in 2010, which reaches overseas and requires all foreign banks and financial institutions to automatically report to the IRS (without IRS subpoena or request) information regarding their American client accounts. Essentially, every foreign bank becomes an agent of the IRS. If a foreign bank or financial institution does not agree to FATCA reporting, then the U.S. will penalize it by withholding significant amounts of U.S.-source income. Recently, many countries have signed on to FATCA, including Spain, Italy, Norway, Germany, Mexico, the UK, Ireland and Switzerland. Many other countries (some seventy five around the world) have announced that they are negotiating FATCA deals with the U.S., including South Africa, Singapore and Liechtenstein.
People suggest to us that foreign jurisdictions still exist which could act as shelters for non-compliant assets. We hear that certain countries are “the next Switzerland”. Since 2008, when UBS became the target of DOJ’s civil and criminal prosecution, the flow of funds exiting Switzerland for Singapore, for example, has been significant.
However, no reputable financial jurisdiction (including Singapore) would risk its financial reputation to harbor non-compliant accounts. Singapore makes a significant amount of money from legitimate international banking and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago. To this end, Singapore has recently announced that it is in talks with the U.S. on a FATCA-type of agreement. In addition, a new Singapore regulation requires banks to identify all accounts that may harbor the proceeds of tax evasion, and close them. Failure to abide by this new law will result in criminal charges for the Singaporean bankers.
Virtually all reputable financial institutions around the world – – at least the credible, stable ones, i.e., places one would want to bank because of safety and stability – – will report to the IRS. Nations “off the grid” may welcome dollars, but one must ask whether depositing assets in an unsafe or unstable jurisdiction is a prudent move. Is it worth it to move money from the first world to the third world in order to avoid the IRS, if the risk of losing the money is significant?
Finally, even assuming that you find a new harbor for your foreign assets, there will almost certainly be a paper trail of where your assets went. The last bank statement from your prior account will show an outward transfer. That will be a road map for the IRS once it obtains the statement by subpoena, summons, treaty request or settlement agreement.
Closing the Account May Not be Enough
Merely closing a foreign account is not a viable solution, because DOJ and IRS never limit their investigations to only current accounts. In the case of UBS, DOJ’s John Doe Summons sought banking records back to 2000. In the case of Liechtensteinische Landesbank, DOJ requested records back to 2004. In the case of Julius Baer, the investigation goes back to 2002. DOJ’s request to Liechtenstein trust companies and other fiduciaries sought records back to 2001.
In other words, closing an account today does nothing to remedy the non-compliant past, and DOJ and the IRS focus on past non-compliance. In addition, a wire transfer or bank check from the foreign account to a U.S. account (or account elsewhere) creates an easy trail back to the foreign account, and also gives rise to due diligence, “know your client” and source of funds inquiries by the recipient bank. Using the non-compliant funds to buy real estate or other assets also creates a trail and does nothing to undo the non-compliant past, which will be the focus of the IRS investigation.
The Era of Bank Secrecy is Over
It seems that with every passing year, bank secrecy continues to decrease and the risk of discovery increases. In 2013, the following events occurred:
– Switzerland agreed to a settlement with the U.S. Department of Justice (DOJ) whereby almost all Swiss banks will begin to report bank account data to the U.S. without a need for court orders or government-to-government treaty requests.
– Liechtenstein agreed to sign a global treaty allowing for increased bank transparency and automatic exchange of tax information. It is also expected that Liechtenstein will sign on to FATCA.
– All reputable countries are agreeing to the exchange of information and banking transparency. In 2013, Luxembourg agreed to automatic exchange of bank depositor information beginning in January 2015. Likewise, Austria, the last remaining EU member holdout, agreed in 2013 to share banking data.
– The U.S. Department of Justice has sent summonses and requests for banking information to the following: Bank Julius Baer, the Liechtenstein Foundation Supervisory Authority, CIBC First Caribbean International Bank, Bank of Butterfield, HSBC and others. DOJ is investigating many Swiss banks, Israeli banks, banks in Luxembourg, the Caribbean and elsewhere. IRS and DOJ are not stopping at Switzerland. U.S. investigators are paying particular attention to “leaver accounts”, i.e., the accounts of those people who leave Swiss banks in favor of banks elsewhere, in an attempt to continue to evade the IRS. It should be noted that under the 2013 Swiss-U.S. settlement agreement discussed above, Swiss banks are required to identify “leaver accounts” specifically, and report them to DOJ.
In 2014, foreign banks will begin to report information to the IRS under FATCA.
The Window of Opportunity to Come Into Compliance Could Close Anytime
It is possible to bring your foreign assets into tax compliance by disclosing the assets to the IRS before the IRS learns of those assets, and to participate in a partial amnesty program known as the Offshore Voluntary Disclosure Program (“OVDP”). If the IRS learns about your foreign assets (through any means, including from a foreign bank or foreign government, as a result of an audit or investigation, or even because of a whistle blower such as an ex-spouse or adversary), then the IRS will not accept your disclosure and the full weight of tax fraud penalties will apply, including criminal prosecution. If accepted into the OVDP, such consequences can be avoided, although back taxes, interest and penalties will be due.
However, at any time the IRS can “close the door” on the opportunity to voluntarily disclose a foreign financial asset and to participate in the OVDP. Under the most recent terms of the Voluntary Disclosure Program, the IRS merely has to announce that account holders at any specific bank under investigation are precluded from making a voluntary disclosure. The significance is that U.S. clients can no longer wait for an announcement of a DOJ summons or a treaty request before they decide to come forward. The door to come forward can be closed by the IRS much earlier and without warning. That is a new variable in the opportunity to make a voluntary disclosure. It increases the risk of prosecution and it creates more immediate pressure to come into tax compliance. Timing, once again, is everything, and the IRS can close the door at any time.
The common theme through all of the above is that if you have a foreign account or other asset that is not U.S. tax compliant, it will only get more difficult to keep the IRS from discovering the account, to maintain the account in a safe and secure institution, and to access your funds. Now is the time to consult with U.S. tax counsel on what to do about your offshore assets, how to minimize your exposure, how to bring the assets into compliance, and how to safely access your money.
Two weeks ago, I wrote The Next Wave of IRS Offshore Account Enforcement: Israeli Banks Under Scrutiny. In that article, I discuss the IRS and Department of Justice (DOJ) expanding their global scrutiny of undeclared foreign banking to include accounts at Israeli banks.
This week, DOJ announced indictments against three Israeli-American tax preparers for helping their clients hide monies from the IRS, including moving money to Israeli banks, and using foreign corporations to hide income.
The DOJ press release, “Three Tax Return Preparers Charged with Helping Clients Evade Taxes by Hiding Millions in Secret Accounts at Two Israeli Banks”, can be found here.
According to the CNBC report, “the indictment revealed the existence of a grand jury that is almost surely going after much bigger fish.” Further, “the new case is just the beginning of a potential series of indictments, which may snare some of the wealthy American clients who have hidden money in Israel, many for generations. That’s likely to be politically controversial . . . .”
Over a year ago, in my article “IRS Targeting Undeclared Accounts in Israel for Tax Fraud“, I discussed the IRS moving beyond accounts in Switzerland and focusing on accounts in Israel. My most recent article, The Next Wave of IRS Offshore Account Enforcement: Israeli Banks Under Scrutiny, discussed the current state of the inquiry into Israeli banks and non-compliant offshore accounts.
In light of the IRS and DOJ enforcement efforts against offshore accounts that are not tax compliant, owners of such accounts should meet with qualified tax attorneys to discuss their situation and their available options. Please contact us for a confidential and privileged discussion about your situation.
There have been many important recent developments regarding offshore banking. The cumulative result of these recent events is the continued eradication of offshore banking secrecy for accounts that are not tax compliant and the consequent increased risk of discovery and prosecution.
1. Additional Criminal Prosecutions For Undeclared Foreign Accounts
The US Department of Justice (DOJ) continues to criminally prosecute taxpayers with undisclosed foreign bank accounts. Please see our recent post here for details. This latest wave of criminal prosecutions appears to be timed to give additional incentive for taxpayers to take advantage of the IRS Offshore Voluntary Disclosure Initiative (OVDI), which runs until August 31, 2011.
Acceptance into the OVDI results in lower penalties and the avoidance of criminal prosecution. On the government’s side, it brings foreign funds back into the US tax system and avoids using governmental resources for investigating and then prosecuting the tax non-compliance. Thus, the OVDI can benefit both the government and the taxpayer.
2. Credit Suisse And Other Foreign Banks Under IRS And DOJ Investigation; HSBC and Bank Leumi Warn Clients To Become Tax Compliant
We have known for a long time that Credit Suisse, like UBS before it, has been the target of a US government investigation for assisting US clients in hiding foreign funds from taxation. This week, Credit Suisse revealed that it received a letter from the US Department of Justice officially alerting the bank that it is the target of a criminal tax investigation. Credit Suisse, along with Bank Julius Baer, Wegelin Bank and the regional Swiss Cantonal banks, are all under investigation for aiding and abetting US tax fraud.
In February 2011, four Credit Suisse bankers were indicted in the US for assisting Americans to hide income from the IRS. The Department of Justice stated that “the conspiracy dates back to 1953 and involved two generations of US tax evaders including US customers who inherited secret accounts.” The allegations also included a charge that a Credit Suisse banker suggested that non-compliant funds be transferred from Switzerland to a bank in Israel in order to avoid detection by the IRS. Tracing noncompliant funds from Swiss banks to Israeli banks is indicative of the expanding global scrutiny and effectiveness of the investigations. (For our article on Israeli banks under scrutiny, please click here.)
The investigations are not limited to Swiss banks. Banks of all sizes, in many other countries, are being targeted. HSBC is also facing similar allegations, and is the subject of a federal court summons to reveal the identities of account holders with undeclared accounts in India. (For our articles on Indian banks under scrutiny, please click here and here.) Also this week, HSBC sent a letter to its US clients urging them to bring their accounts into tax compliance. The letter provided details about the IRS Offshore Voluntary Disclosure Initiative. Last year, Bank Leumi, an Israeli bank, sent similar letters to its US clients with foreign accounts. Liechtensteinische Landesbank in Liechtenstein, Bank Leumi and Bank Hapoalim in Israel are also under investigation by the IRS and US Department of Justice.
Those are the foreign banks whose investigations are public. We have reason to believe that many additional banks in various foreign countries are also being investigated by the IRS for similar activities. To facilitate the investigations, the IRS has opened field offices in Australia, Panama, China and Hong Kong. From the many thousands of voluntary disclosures thus far, the IRS and DOJ have compiled an extensive database of foreign banks and individual bankers, attorneys, trustees and other service providers who are under investigation for facilitating tax fraud. DOJ prosecutes both the foreign service providers and the US account holders who did not disclose the foreign accounts.
In light of DOJ’s success in obtaining account information from UBS and the eradication of Swiss banking secrecy over the past few years, we anticipate that HSBC and Credit Suisse will have little ability to withstand a DOJ information subpoena and/or criminal indictment. This is underscored by the decision this week by the Swiss Federal Supreme Court (see 4. below) that the disclosure of secret UBS bank account data to the IRS in 2009 was lawful.
The resulting conclusion is that owners of non-compliant foreign accounts, whether at Credit Suisse or elsewhere, should apply for acceptance into the OVDI before they are discovered. The OVDI expires on August 31, 2011.
3. FATCA Reporting Requirements For Offshore Assets Are Delayed
The Foreign Account Tax Compliance Act (FATCA), which was signed into law in 2010 as part of the HIRE Act, imposes additional reporting requirements on US taxpayers with foreign holdings, and also obligates foreign banks to report account information to the IRS. FATCA’s reporting requirements were scheduled to commence in 2013. This week, the IRS announced a delay in the beginning dates of these new requirements. The new requirements will be phased in over 2014 and 2015.
It has been reported that these delays reflect the many negative comments received by the IRS on the new reporting requirements. Foreign banks and taxpayers alike have commented that these disclosure requirements are very burdensome. Many critics of FATCA predict that the new laws will result in many foreign financial institutions no longer doing business in the US, and a resulting decline in US investments from abroad.
4. Swiss High Court Affirms That UBS Revealing “Secret” Banking Information Was Lawful
Also this week, the Swiss Federal Supreme Court upheld the 2009 disclosure of UBS bank account information to US authorities, notwithstanding that the disclosure violated Swiss banking secrecy laws. The Swiss court ruled that the disclosure was lawful because it was necessary to avoid an economic catastrophe that would have ensued if UBS had not disclosed the account information.
Even if the Swiss high court had held the opposite way, i.e., that provision of account information to the IRS was improper, the incriminating information has already been in the possession of the IRS and US prosecutors for months, and has formed the basis for multiple prosecutions (see point 1, above). Had the Swiss court ruled the other way, it would have had no practical effect on these prosecutions or given the US defendants any relief. It might have, however, given the US account holders a cause of action to sue UBS in Swiss courts. But now, it appears that even that road is dead.
Further, this ruling should be scary to US taxpayers with accounts at Credit Suisse, Julius Baer, Wegelin, the Kantonal banks and other Swiss banks, because essentially, the Swiss high court has given its blessing to the end of Swiss banking secrecy.
5. No Settlement Between US And Switzerland On Offshore Banking
Last month, we wrote that the United States and Swiss governments were in negotiations toward ending US investigations of numerous Swiss banks for hiding assets from US taxation. Under such an agreement, the US would not prosecute the Swiss banks, and the banks would provide information to the US about Americans with non-compliant accounts and pay large penalties. This week, we learned that the negotiations have ceased after the US stated its lack of interest in pursuing a settlement.
Given the expanding offensive of the IRS and DOJ against Credit Suisse and other banks (see point 2, above), this latest twist is not surprising. Clearly, the US has significant leverage against Swiss banks. From over twenty thousand voluntary disclosures, the US has a mass of information implicating many Swiss banks and individual bankers for their roles in tax fraud. Credit Suisse has a significant presence in the US – – employees, branches and valuable assets within the US, plus a lucrative US banking license. The same US presence and vulnerability compelled UBS to settle with the US in 2009 and avoid criminal prosecution. With such momentum and continued leverage on its side, no wonder the US is flexing its muscles and walking away from a settlement.
6. Whistle Blowers Are Still A Threat To Offshore Accounts
We reported earlier this year that account information from Swiss bank Julius Baer had been copied by a Julius Baer employee and would be made public, via Wikileaks. This followed the purchase by the German government of supposedly secret account data from an employee of LGT Bank in Liechtenstein, and the provision of stolen HSBC data to the French government.
This week, it emerged that one disc containing the Julius Baer data was blank and the other disc did not contain incriminating bank data. Nevertheless, we’ve known for months that Julius Baer is already “on the radar” because many Americans accepted into the IRS Voluntary Disclosure Program have disclosed their Julius Baer accounts. For Americans who did not disclose their Julius Baer accounts, immediate disclosure via the OVDI is strongly advised. Once the IRS gets the name of an account holder from any source (audit, whistleblower, investigation or otherwise) a voluntary disclosure is too late and criminal prosecution is likely.
As a footnote, this week it was also revealed that Hans Kieber, the LGT banker who stole account data, sold it to the German government and has been in hiding ever since, recently testified to authorities in Australia about undeclared offshore bank accounts. As we’ve written, the revelation of bank account data by whistle blowers remains a serious threat to offshore bank secrecy.
The above developments further highlight the withering of offshore banking secrecy and the serious enforcement efforts by the IRS and DOJ against foreign banks and US taxpayers with noncompliant foreign accounts. The OVDI deadline is August 31, 2011. Bringing noncompliant foreign accounts into tax compliance is very strongly recommended.
This week, Anton Ginzburg, another taxpayer with a non-compliant account at UBS, plead guilty in a Federal Court in New York to criminally concealing his account and failing to disclose the account on the required FBAR form. This taxpayer faces a jail sentence of up to five years and a fine of approximately $1.5 million, constituting fifty percent (50%) of the value of the account during 2007. In fact, the law allows the government to impose a 50% penalty for every year that the account was non-compliant, although the pattern in recent criminal prosecutions is that if the defendant enters a guilty plea, the government imposes a 50% penalty for one year.
This potential jail sentence and monetary fine stands in contrast to taxpayers who voluntarily disclose their foreign accounts. A proper voluntary disclosure would avoid a criminal prosecution and jail time, and the fine would be capped at twenty five percent rather than fifty percent.
On June 28, Dr. Arvind Ahuja, another Indian-American taxpayer, was indicted in Federal Court in Wisconsin for failing to disclose his foreign accounts at HSBC India and the Channel island of Jersey. We have written at length about the particular focus that the government has on accounts in India owned by Indian-Americans. See our articles here, here and here.
Also in late June, taxpayer Kenneth Heller pled guilty in Federal Court in New York to failing to disclose his foreign account at UBS. His fine was close to $10 million and he faces a potential prison term of up to fifteen years. Mr. Heller’s case also involved his attempts to avoid detection by moving his foreign funds from UBS, which was under IRS scrutiny, to Wegelin, a smaller Swiss bank. However, as we know, many Swiss banks are under investigation for providing non-compliant accounts, including Wegelin, Julius Baer and the regional Cantonal Banks.
Also in late June, taxpayers Sean and Nadia Roberts pled guilty in Federal Court in California to failing to disclose their offshore accounts at UBS in Switzerland, as well as other accounts in Liechtenstein, Isle of Man, Hong Kong, South Africa and New Zealand.
Finally, also in June, taxpayer Robert Greeley was charged in Federal Court in California with failing to disclose a foreign account at UBS.
Comments and lessons from these latest prosecutions:
- This recent wave of criminal prosecutions for undeclared foreign accounts appears to be timed to incentivize taxpayers with such accounts to come forward under the Offshore Voluntary Disclosure Initiative, which runs until August 31, 2011.
- Accounts in various countries (not only Switzerland) are being targeted. Accounts in India (see above) and Israel are particular targets. Accounts of various sizes are being targeted. The IRS has opened field offices in Panama, Hong Kong, China and Australia to investigate offshore tax noncompliance. Efforts to move assets from large banks to smaller banks supposedly “under the radar” are ineffective and could result in additional criminal charges.
- Some of the taxpayers prosecuted for non-compliant foreign accounts utilized foreign corporations in attempt to obscure the true beneficial ownership of such accounts. As these prosecutions show, such a strategy is not effective. Using a foreign entity like a corporation, trust or foundation seems to draw even more anger by the IRS, as it exhibits an additional level of willful non-compliance and obfuscation of the foreign assets. However, even taxpayers whose foreign assets are in their own names and not in the names of foreign entities are being prosecuted. The lesson is that non-compliant foreign assets, whether in your name or the name of an entity, are vulnerable to investigation and criminal prosecution.
- Based on recent criminal prosecutions, plea deals and sentences, we can make the following rough conclusions:
Fight the IRS accusations at trial and lose: long jail sentences (e.g., ten years) and large fines.
Plead guilty to the IRS accusations and avoid a trial: shorter sentences, house arrest and probation, plus 50% penalty during one year (rather than 50% each year).
Voluntarily disclose the account: no jail, 25% penalty.
Asher Rubinstein’s article, “The IRS Offensive Against Offshore Accounts: New Attacks and New Relief” published in Tax Notes International, Vol. 62, number 4
by Asher Rubinstein
Reprinted from Tax Notes Int’l, April 25, 2011, p. 293
In 2009 U.S. prosecutors achieved a staggering victory against UBS, forcing the largest Swiss bank to settle criminal and civil charges that it aided and abetted tax fraud by assisting Americans to hide funds from U.S. taxation. UBS also was compelled to disclose to the IRS the identities of thousands of Americans with formerly secret Swiss accounts. This was a stunning breach of hitherto ironclad Swiss bank secrecy. Yet since then, the IRS has criminally prosecuted only 30 Americans for hiding offshore accounts to escape taxation.
Contrary to the perception of calm since the UBS settlement, recent events make clear that the IRS is still very active in ferreting out undisclosed offshore assets. The IRS is investigating additional banks and other jurisdictions, and it is prosecuting more Americans with undeclared foreign funds. The IRS’s continuing efforts are buttressed by further erosions of bank secrecy by tax information exchange agreements between the U.S. and former tax haven jurisdictions, and by disclosures of offshore bank clients made by disgruntled bank employees. Also, the new Foreign Account Tax Compliance Act (FATCA) creates new reporting requirements for U.S. taxpayers and foreign financial institutions, which will provide more information to IRS investigators.
However, notwithstanding this continuing offensive against noncompliant offshore banking, the IRS has offered a new opportunity for Americans to bring their foreign accounts into tax compliance via the 2011 offshore voluntary disclosure initiative (OVDI).
Additional IRS Targets
In early April 2011, the DOJ asked a federal court in California to issue a John Doe summons against HSBC that asks for the names of U.S. taxpayers with accounts at HSBC in India. The John Doe summons is how the government began its attack against UBS, which led to UBS disclosing account holders’ identities to the IRS and ultimately the erosion of Swiss bank secrecy. In the summer of 2010, the DOJ sent letters to HSBC foreign account holders, advising them that they are the subjects of criminal investigations relating to unreported accounts in India and Singapore. The DOJ has prosecuted a Virginia surgeon and two Miami Beach real estate developers for undeclared foreign accounts with HSBC.
In early February 2011, the real estate developers, father Mauricio Cohen Assor and his son Leon Cohen-Levy, were each sentenced to 10 years’ imprisonment for utilizing undeclared foreign HSBC accounts and foreign entities such as corporations in Panama and the Bahamas to avoid U.S. taxation. While most of the earlier offshore tax fraud prosecutions resulted in plea bargains for more lenient punishment such as probation and home detention, the Cohens’ 10-year sentences resulted from the first court trial of the recent offshore account prosecutions. The use of intermediary entities (such as foreign corporations, trusts, or foundations) to obscure the true beneficial ownership of the underlying foreign bank account seems to draw the ire of the IRS even more than a foreign account held personally, although both types of noncompliant foreign accounts could give rise to criminal tax fraud charges.
There are also reports that HSBC is implicated in the recent criminal prosecution of Vaibhav Dahake, an Indian-American with undeclared accounts in India and the British Virgin Islands. While the criminal indictment against Dahake does not mention HSBC by name, it alleges that an ‘‘unidentified bank’’ operated a division called NRI Services that specifically marketed foreign banking services to Americans of Indian descent. According to the allegations in the indictment, the bank advised that accounts be opened in India because they paid higher interest rates; no U.S. tax forms or Social Security numbers would be required; and the accounts would not be taxed in India. Interestingly, the indictment details transactions with a total value of less than $200,000. This suggests that the government is sending a message that all noncompliant foreign accounts, large and small alike, are vulnerable to investigation and prosecution.
Other banks besides HSBC are also targets. In February 2011 the DOJ charged multiple bankers at Credit Suisse with enabling tax fraud via noncompliant offshore accounts. In December 2010 Deutsche Bank paid $553 million to settle tax fraud charges brought by the U.S. government. The charges related to tax shelters set up from 1996 through 2002 that were ultimately determined by the courts to be shams. Accounting firm KPMG was previously prosecuted for promoting these tax shelters. While sham tax shelters differ from unreported offshore bank accounts, the government’s efforts against Deutsche Bank indicate its growing initiative against banks that facilitate tax fraud.
There have also been reports that some clients of Swiss banks, when faced with the prospect of U.S. prosecution, disclosed to the IRS a portion of their funds at UBS, but moved other, undisclosed funds to smaller banks that were supposedly off the radar. The recent criminal prosecution of UBS banker Renzo Gadola, accused of advising and assisting Americans to evade taxes, now places those smaller cantonal (regional) Swiss banks firmly on the radar. The allegations are that Gadola utilized a small bank, Basler Kantonalbank, rather than UBS, in order to avoid detection. We can now add Basler Kantonalbank (and presumably other regional Swiss banks such as Zurich Kantonalbank) to the list of banks being investigated. Banks large and small and accounts of all sizes are vulnerable. Taxpayers should not believe that an account under a certain size is safe from discovery, nor is any bank, regardless of its size, off the radar.
Note that the cantonal banks do not have a U.S. presence. It was the substantial U.S. presence of UBS, and now HSBC, that made such banks vulnerable to U.S. prosecution. With U.S. banking licenses, multiple branches within the U.S., thousands of employees in the U.S., and billions of dollars in assets in the U.S., these banks are clearly within the jurisdiction of a U.S. court and susceptible to an adverse court judgment or order. UBS had to settle the tax fraud charges against it because the alternatives — seizure of its U.S. assets and revocation of its lucrative U.S. banking license — would have been catastrophic.
While the smaller cantonal banks do not have a U.S. presence, they are still subject to Swiss law, which now requires cooperation with the IRS. Following generations of Swiss bank secrecy, in 2010 Switzerland’s parliament changed long-standing Swiss bank secrecy laws to allow for cooperation and exchange of information with the IRS in both criminal and civil tax investigations. In 2009, Switzerland and the U.S. signed a new TIEA, which further eroded Swiss bank secrecy. The new agreement allows the U.S. greater access to Swiss banking records of American taxpayers, including records at the smaller cantonal banks.
Whistleblowers, Snitches, and Thieves
Bank employees handing over supposedly ‘‘secret’’ bank data is not new. In 1999 John Mathewson, the owner of Guardian Bank and Trust, a now-defunct Cayman Islands bank, was charged in the U.S. with money laundering. When Mathewson was arrested, he gave federal investigators bank records that contained information about American depositors at the bank who had evaded U.S. tax obligations. Mathewson gave up the bank data in return for leniency in his criminal sentencing.
In 2008 a renegade employee of LGT Bank in Liechtenstein stole data about client accounts and sold it to the German intelligence service in return for millions of euros. With that data, the German government prosecuted many prominent Germans for tax fraud. The German government also shared the data with other governments around the world. In 2009 an employee of HSBC provided bank account data to the French government. In 2010 Germany again purchased bank data, stolen by an employee of a Swiss bank. The DOJ was able to successfully prosecute UBS, and then UBS clients, because of information that had been disclosed by UBS banker Bradley Birkenfeld to the U.S. government.
Further Erosion of Banking Secrecy
The next bank to face DOJ action may be Julius Baer. It has been reported that this disclosure will be made via WikiLeaks. The banking data to be revealed comes, like the Guardian, LGT, UBS, and HSBC cases mentioned above, from internal bank sources — specifically, a disgruntled former employee of Julius Baer.
Irrespective of WikiLeaks, Julius Baer is already on the radar because many Americans accepted into the IRS voluntary disclosure program have disclosed their Julius Baer accounts. These account holders are now being interviewed by IRS investigators, presumably to build a case against Julius Baer, like UBS and HSBC. For Americans who did not disclose their Julius Baer accounts, immediate disclosure is strongly advised. Once the IRS gets the name of an account holder — from WikiLeaks or any other source (audit, whistleblower, investigation, or otherwise) — a voluntary disclosure is too late and criminal prosecution is likely.
Targets Beyond Switzerland
There are reports that IRS and DOJ investigators are also focusing on banks in Asia and the Middle East. Following the erosion of Swiss bank secrecy, large amounts of funds were reported to have been moved from Switzerland to Singapore. However, Singapore has taken steps to be removed from the OECD gray list of foreign tax havens and has discussed entering into an income tax treaty with the U.S. and other countries. In order to preserve its status as a major financial hub, Singapore has taken steps toward greater financial transparency. Also, as the HSBC investigation noted above illustrates, Singapore is very much under the watch of the IRS.
Following its success against UBS, the IRS has expanded beyond undeclared Swiss accounts to undeclared funds in other foreign jurisdictions. The IRS has opened or will soon open field offices in Panama, Australia, and China. TIEAs have been signed by all the former tax havens, including Liechtenstein and Monaco. While the IRS is intensifying its presence and its available tools around the world, it appears to be particularly concentrating on India and Israel.
New IRS Target: India
As noted above, HSBC is accused of having specifically targeted Indian-American clients and offered offshore banking services in India and Singapore. The John Doe summons against HSBC demonstrates that DOJ and IRS have moved beyond Switzerland, and India is now firmly a target for noncompliant offshore accounts. While UBS advised American clients that their accounts may be subject to exposure to the IRS, and therefore suggested preemptive disclosure, Americans with accounts at HSBC in India received letters from the DOJ in 2010, making it clear that the DOJ already had their names. In such a case, preemptive disclosure is impossible; the IRS will reject a voluntary disclosure if the taxpayer is already under investigation or if the IRS already has the taxpayer’s name (regardless of the source).
It appears that the stolen LGT bank data purchased by the German government (noted above) were also shared with the government of India. The Indian authorities have launched prosecutions of Indian citizens who had undeclared accounts outside of India. In 2010 India signed a protocol to the income tax treaty with Switzerland, and India is in the process of negotiating tax treaties with 65 countries. While there currently is no tax treaty between India and Liechtenstein, Liechtenstein has shown its new transparency by promulgating multiple tax treaties with other countries, including the U.S., and a future treaty with India is likely. But even in the absence of such a treaty, India already has names, thanks to the LGT affair. The LGT information is almost certainly in the possession of the IRS as well.
Another IRS Target: Israel
Some Americans feel comfortable not disclosing their Israeli bank accounts to the IRS because of Israel’s close ties with the U.S. They believe the IRS is reluctant to investigate Israeli banks. However, owners of accounts in Israel may soon feel the brunt of the next wave of the IRS crackdown on offshore banking.
Israel is in a unique situation in relation to the IRS because of ties between Israel and Jews around the world, including Jews who have inherited so-called Holocaust accounts. One example of a Holocaust account is an account established in Switzerland by European Jews before the Holocaust in an attempt to safeguard their assets from the rise of Nazi Germany. Another example is an account established after World War II by a Holocaust survivor in order to receive German reparation payments. In either case, tax avoidance was not the motivation behind the establishment of the accounts. (The same can be said of Greeks fleeing persecution in Turkey, who put their funds in Switzerland for reasons of safety and stability, or Egyptian Jews fleeing the military coup and dictatorship of Gamal Nasser, or various other refugees who put their money is Swiss banks to preserve and protect their assets in the face of persecution and upheaval.) Now, many decades later, their descendants who have inherited these accounts are in a position of unintended tax noncompliance because they were not aware of their obligation to annually report these accounts to the Treasury Department on Form TD 90-22.1, the ‘‘Report of Foreign Bank and Financial Accounts’’ (FBAR), even if no tax was due.
While Swiss bank secrecy laws presented a formidable challenge to the IRS before the UBS case, pursuing undisclosed accounts in Israel will not require nearly as much effort. The tax treaty between the U.S. and Israel enables the two countries to ‘‘exchange such information as is pertinent to . . . fraud or fiscal evasion in relation to the taxes which are the subject of this Convention.’’ Cooperation between the U.S. and Israel is routine in many matters, tax and otherwise. According to the Israeli Ministry of Justice, ‘‘The [Israeli government] has cooperated with requests from U.S. law enforcement in matters of financial crime.’’ Although this statement refers to Israel’s fight against money laundering, it is not a stretch to conclude that the ministry would cooperate with requests from the IRS in matters specifically pertaining to undisclosed bank accounts.
Also, the U.S. and Israel currently grant legal assistance to each other in criminal matters via a mutual legal assistance treaty (MLAT). The MLAT states that the U.S. and Israel ‘‘express their understanding that this treaty applies to . . . criminal tax offenses.’’ It is particularly noteworthy from an offshore banking perspective that for ‘‘serious [fiscal] offenses involving willful, fraudulent conduct,’’ the treaty even provides for the exchange of bank records.
It is not our conclusion that the IRS is specifically targeting Holocaust accounts. Indeed, while the OVDI penalty for offshore accounts is 25 percent, a specially reduced 5 percent penalty applies, in certain circumstances, to Holocaust accounts. We believe that the presence of undeclared assets in Israel (whatever their source, including the cash-heavy jewelry trade) presents a specific target to the IRS. Along these lines, in 2010 Israel’s Bank Leumi took the extraordinary step of sending letters to its U.S. customers, strongly advising them to disclose their accounts to the IRS. That Credit Suisse bankers allegedly advised clients to transfer funds to Bank Leumi also presents the IRS with a roadmap to Israeli accounts.
A Glimmer of Relief
In February 2011 the IRS announced its OVDI, mentioned earlier, which closely mirrors the 2009 offshore voluntary disclosure program (OVDP) with a few refinements. The new penalties are 25 percent, greater than the 20 percent penalty under the prior OVDP, yet less than the 50 percent penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.
The new OVDI presents an opportunity for Americans
with foreign accounts who did not come forward under the 2009 OVDP but who still want to avoid criminal prosecution and bring their foreign accounts into compliance. As noted repeatedly, the IRS continues to target foreign accounts. Taxpayers are strongly advised to bring noncompliant foreign accounts into tax compliance in order to avoid discovery by the IRS, higher penalties, and criminal prosecution. In this new era of international transparency, decreased banking secrecy, cooperation and information between governments, and stronger enforcement efforts, offshore banking compliance is very highly recommended.
Asher Rubinstein’s article “IRS Offensive Against Offshore Accounts” published in Accounting Today.
The IRS and U.S. Department of Justice (DOJ) continue their investigations into foreign banks that assisted U.S. taxpayers in hiding assets from the IRS. There have been reports that Bank Leumi and other Israeli banks are now under investigation. Taxpayers with undeclared accounts at Israeli banks are vulnerable to discovery and prosecution.
The new focus on Israel follows the IRS’ success against Swiss banking secrecy. In 2009, U.S. prosecutors achieved a staggering victory against UBS, forcing the largest Swiss bank to pay $780 million to settle criminal and civil charges that it aided and abetted tax fraud by assisting Americans to hide funds from U.S. taxation. In a stunning breach of hitherto ironclad Swiss banking secrecy, UBS was also compelled to disclose to the IRS the identities of thousands of Americans with formerly “secret” accounts. In February, 2011, DOJ charged bankers at Credit Suisse with offering undeclared accounts to taxpayers. The Credit Suisse bankers were also accused of advising their U.S. clients to transfer funds to Bank Leumi in order to avoid discovery by U.S. authorities. Bank accounts in Israel appear to be one of the next targets. People with undeclared accounts in Israel should take action in light of the IRS crackdown on offshore accounts that are not tax compliant.
Many American Jews maintain bank accounts in Israel for various reasons: business ties, costs associated with owning real estate in Israel, accounts to assist family members, etc. It is completely legal to have an account in Israel, provided that (1) the account is disclosed to U.S. authorities on IRS Form 1040, Schedule B and on the FBAR, Report of Foreign Bank Accounts, Form TD 90.22-1, and (2) income earned in the account (including interest, dividends and capital gains) is reported to the IRS and taxes paid on this income. So long as those two conditions are met, the account is tax compliant. If the account is not tax complaint, a U.S. taxpayer who owns or has beneficial interest in an Israeli account can be prosecuted for civil and criminal tax fraud.
Israel is in a unique situation vis-a-vis the IRS because of ties between Israel and Jews around the world, including Jews who have inherited “Holocaust accounts”. One example of a “Holocaust account” is an account established in Switzerland by European Jews prior to the Holocaust, in an attempt to safeguard their assets from the rise of Nazi Germany. Another example is an account established after World War II by a Holocaust survivor in order to receive German reparation payments. In either case, tax avoidance was not the motivation behind the establishment of the accounts. (The same can be said of Greeks fleeing persecution in Turkey, who put their funds in Switzerland for reasons of safety and stability, or Egyptian Jews fleeing the military coup and dictatorship of Gamal Nasser, or various other refugees who put their money is Swiss banks to preserve and protect their assets in the face of persecution and upheaval.) Now, many decades later, their descendants who have inherited these accounts are in a position of unintended tax non-compliance because they were not aware of their obligation to annually report these accounts to the Treasury Department on the FBAR, even if no tax was due.
Some U.S. taxpayers mistakenly believe that the IRS is reluctant to investigate Israeli banks because of Israel’s close ties with the U.S. However, there is no indication that Israeli banks, unlike Swiss banks, would be immune from the IRS. In fact, Israel and the U.S. have a long history of close cooperation in tax matters.
Whereas Swiss bank secrecy laws presented a formidable challenge to the IRS prior to the UBS case, pursuing undisclosed accounts in Israel will not require nearly as much effort. The tax treaty between the U.S. and Israel enables the two countries to “exchange such information as is pertinent to . . . fraud or fiscal evasion in relation to the taxes which are the subject of this Convention.” Cooperation between the U.S. and Israel is routine in many matters, tax and otherwise. According to the Israeli Ministry of Justice, “the [Israeli Government] has cooperated with requests from U.S. law enforcement in matters of financial crime . . . .” Although this statement refers to Israel’s fight against money laundering, it is not a stretch to conclude that the Ministry would cooperate with requests from the IRS in matters specifically pertaining to undisclosed bank accounts.
In addition, the U.S. and Israel currently grant legal assistance to each other in criminal matters via a Mutual Legal Assistance Treaty (MLAT). The MLAT states that the U.S. and Israel “express their understanding that this treaty applies to . . . criminal tax offenses . . . .” It is particularly noteworthy from an offshore banking perspective that for “serious [fiscal] offenses involving willful, fraudulent conduct,” the treaty even provides for the exchange of bank records.
It is unlikely that the IRS is specifically targeting “Holocaust accounts”. Indeed, whereas the 2011 IRS Offshore Voluntary Disclosure Initiative imposes a 25% penalty for offshore accounts, a specially reduced 5% penalty applies, in certain circumstances, to inherited Holocaust accounts. The presence of undeclared assets in Israel (whatever their source, including the cash-heavy jewelry trade) presents a desirable target to the IRS. Along these lines, in 2010, Bank Leumi took the extraordinary step of sending letters to its U.S. customers, strongly advising them to disclose their accounts to the IRS. That Credit Suisse bankers allegedly advised clients to transfer funds to Bank Leumi also presents the IRS with a roadmap to Israeli accounts.
It was the substantial U.S. presence of UBS, that made it vulnerable to U.S. prosecution. Likewise, large Israeli banks like Bank Leumi, with a U.S. banking license, multiple branches within the U.S., thousands of employees in the U.S., and billions of dollars of assets in the U.S., are clearly within the jurisdiction of a U.S. court and susceptible to an adverse court judgment or order.
Amidst the specific enforcement action against individual banks, the larger context is the decline of banking secrecy world-wide.
The IRS has opened field offices in Panama, Australia and China. Tax Information Exchange Agreements have been signed by all the former “tax havens”, including Liechtenstein and Monaco. Even Switzerland changed its internal law to allow for cooperation with foreign governments in tax investigations. While the IRS is intensifying its presence and its available tools around the world, there are indications that the IRS is concentrating more particularly on Israel.
Clearly, against this background of the erosion of banking secrecy and cooperation amongst governments in sharing banking data, taxpayers with undeclared accounts in Israel must consider bringing such accounts into compliance.
In February 2011, the IRS announced the Offshore Voluntary Disclosure Initiative (OVDI), which closely mirrors the 2009 Offshore Voluntary Disclosure Program (OVDP), with a few refinements. The new penalties are 25%, greater than the 20% penalty under the prior OVDP, yet less than the 50% penalty that the IRS has been imposing in recent criminal tax fraud prosecutions.
The new OVDI presents an opportunity for taxpayers with foreign accounts, in Israel and elsewhere, who did not come forward under the former OVDP but still want to avoid criminal prosecution, to bring their foreign accounts into compliance. It is clear that the IRS is moving past UBS and Switzerland to other banks in other countries, and Israel appears to be a particular focus. Taxpayers must bring non-compliant foreign accounts into tax compliance, in order to avoid discovery by the IRS, higher penalties and criminal prosecution. In this new era of international transparency, decreased banking secrecy and stronger enforcement efforts, offshore banking compliance is very highly recommended.
What’s New with Foreign Bank Accounts and Voluntary Disclosures?
by Asher Rubinstein, Esq.
With regard to the UBS matter, the SFTA (Swiss Federal Tax Authority) continues to transmit once-“secret” banking files to the IRS, as per the UBS settlement agreement. Americans whose UBS accounts are being revealed to the IRS and who have not already come forward and voluntarily disclosed their accounts can expect to be on the receiving end of an IRS investigation or subpoena and should consult with a tax attorney. Americans with accounts at foreign banks other than UBS must consider that the IRS is now targeting other banks, including but not limited to Credit Suisse, HSBC and Julius Baer, and these account holders must give thought to cleaning up non-compliant accounts before the IRS discovers the accounts.
Now that the UBS settlement is finalized (i.e., approved by the Swiss Parliament) and the transfer of account information to the IRS is proceeding, the IRS is analyzing the account information that it is receiving, launching investigations against account holders, and prosecuting account holders for not reporting the accounts and not paying taxes on income earned in those accounts. The IRS is also moving past UBS and investigating other banks, in other countries. India is one target of investigation. We also understand that the IRS is focusing on accounts in Israel. We are getting many calls from people with accounts in India and Israel, and also Hong Kong and Singapore, who are looking to put their banking affairs in order.
Also important are the subtle but significant changes in IRS voluntary disclosure practice. First, there are rumors that voluntary disclosures made after June 18, when the Swiss Parliament approved the UBS settlement, will not be accepted. The theory is that once the Swiss Parliament approved the settlement, disclosures are not sufficiently voluntary. In practice, however, we are still representing numerous clients who are still coming forward and making disclosures after June 18, and their disclosures are not being rejected.
Second, the “pre-clearance” process of the voluntary disclosure (whereby the IRS lets us know whether the IRS already has the name of the account holder, which would render the disclosure too late), has also changed, slightly but significantly. In the past, to request pre-clearance, we would only have to provide the individual’s name, address, social security number and date of birth. This is sufficient information whereby the IRS could tell us whether it already had knowledge of the individual, in which case pre-clearance would come back denied, or whether the individual was pre-cleared to continue the voluntary disclosure. Now, however, the IRS is asking for the name of the foreign bank in order to process the pre-clearance. The name of the bank is potentially incriminating information. If pre-clearance is denied, then the IRS already has the person’s name, plus the foreign bank, which makes investigation and prosecution easier for the IRS. The IRS has changed its procedure to require incriminating information in advance of any indication of acceptance into the voluntary disclosure program. This could have a chilling effect on future voluntary disclosures, because people will not be handing over incriminating information without the slightest indication of whether they will be accepted by the IRS. However, if the individual is not concerned with being rejected from the program (for example, the foreign funds are not illegal source funds), then it may still make sense to provide the bank information and proceed with the disclosure. The benefit of disclosure – lower penalties and avoidance of criminal prosecution – may outweigh the provision of potentially incriminating information, especially when there is little risk of non-acceptance into the voluntary disclosure program.
We can assist foreign account holders in addressing such risks, navigating the changing rules and procedures of the voluntary disclosure program, and cleaning up non-compliant foreign accounts.